Regulators can't curb social Web forever

Startups rewriting rules for traditional businesses

Mathew Ingram

Updated 3:18 pm, Friday, January 10, 2014

Photo: Mike Kepka, The Chronicle

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Airbnb co-founders Nathan Blecharczyk (left), Joe Gebbia and Brian Chesky have changed the balance of power in the accommodations industry by allowing someone with a spare room to create a peer-powered business. less

Airbnb co-founders Nathan Blecharczyk (left), Joe Gebbia and Brian Chesky have changed the balance of power in the accommodations industry by allowing someone with a spare room to create a peer-powered ... more

Photo: Mike Kepka, The Chronicle

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Coursera, which partners with universities to offer online courses, is likely to face roadblocks as it tries to expand.

Coursera, which partners with universities to offer online courses, is likely to face roadblocks as it tries to expand.

CEO of Uber Travis Kalanick with one of the car Uber service uses to drive customers in San Francisco, Calif. on May 1, 2012.

CEO of Uber Travis Kalanick with one of the car Uber service uses to drive customers in San Francisco, Calif. on May 1, 2012.

Photo: Siana Hristova, The Chronicle

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CEO of Uber Travis Kalanick with one of the car Uber service uses to drive customers in San Francisco, Calif. on May 1, 2012.

CEO of Uber Travis Kalanick with one of the car Uber service uses to drive customers in San Francisco, Calif. on May 1, 2012.

Photo: Siana Hristova, The Chronicle

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Uber CEO of Uber Travis Kalanickuses shows the application they use to give exact location and connect a customer and a driver in San Francisco, Calif. on May 1, 2012.

Uber CEO of Uber Travis Kalanickuses shows the application they use to give exact location and connect a customer and a driver in San Francisco, Calif. on May 1, 2012.

Photo: Siana Hristova, The Chronicle

Regulators can't curb social Web forever

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By now we've gotten used to the disruption that the rise of the social Web has created in the media industry, where it has upended traditional business models and allowed creators of content to connect directly with their audience.

But that same wave of socially driven disruption is now moving through the rest of the economy, too - particularly in services that can be easily socialized, such as the hotel business, the taxi industry or the education market.

As that wave progresses, we're seeing such companies as Airbnb, Uber and Coursera run into more and more regulatory hurdles, but the writing is already on the wall: Service businesses that don't use social features to lower barriers and increase efficiency will probably not survive long.

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Coursera, which offers online education courses, was recently hit with a regulatory freeze in Minnesota because the rules for education-related businesses in that state require them to jump through a series of hoops, including filing for registration and paying fees.

The state later modified its views on the service after an uproar about these restrictions, but this is unlikely to be the only roadblock the company runs into as it tries to expand.

The reality is that in any number of markets, from education to the hotel industry to broadcasting, regulations haven't kept up with the evolution of the businesses they are supposed to be regulating.

Threat to hotels

Airbnb is in a similar position with the hotel industry: The application of social features - which allow owners of apartments, houses, trailers and even tree houses to easily find and connect with potential short-term renters - has changed the balance of power to the point where someone with a spare room has the ability to create a peer-powered business with virtually no overhead.

That's clearly a threat to the hotel business, which is using whatever political and regulatory connections it can to put limits on the company, even as its grows larger: Airbnb is rumored to be talking with Facebook investor Peter Thiel about a funding round that would value it at $2 billion.

It's important to note that the social aspect of these services is crucial to their success. As I described in a recent post about using Airbnb, the social element isn't just a nice addition, it's a key part of how it functions - and why the barriers to entry and transaction costs are lowered as a result.

If I hadn't been able to see that a homeowner was connected to a Facebook friend of mine, I might never have used Airbnb (and they might never have accepted me as a renter).

Uber, the car-scheduling service, has been another prominent participant in this back-and-forth struggle with regulations and an entrenched industry - virtually everywhere the company has set up shop, from Los Angeles to New York, it has run into a regulatory morass designed to protect the existing taxi and livery industry as much as it is intended to protect consumers.

Although New York has been trying to fast-track changes that would make it easier to operate there, the San Francisco company was recently forced to withdraw one version of its service.

The service has had problems in San Francisco, as well, and is likely to run into similar issues anywhere there is an entrenched taxi industry trying to protect its historic market power and profit margins. In New York, for example, taxi medallions - which allow an owner to operate a cab business there - sell for $1 million each.

Finding a back door

That kind of industry isn't going to appreciate a disruptor like Uber, and in New York in particular, the taxi business is a big political player. In many ways, however, Uber is just the thin edge of a larger wedge: Also coming are services such as Hailo that use an Uber-style service model for the regular cab business.

As New York venture investor Chris Dixon described it in a recent blog post, startups such as Airbnb and Uber are "regulatory hacks" in the sense that they are designed to do an end-run around existing industry regulations - in much the same way the early disruption in telecom was driven by startups that played fast and loose with the rules, eventually forcing regulatory change and becoming the norm. As Dixon puts it:

"Uber is being threatened by the taxi industry, Aereo by the TV broadcasting industry, and Airbnb by the hotel industry. ... Of course, regulations that truly protect the public interest are necessary.

"But many regulations are created by incumbents to protect their market position. To try new things, entrepreneurs need to find a back door. And when they succeed, it will all look obvious in retrospect. Today's regulatory hack is tomorrow's mainstream industry."

Tide advancing

The list of these kinds of companies is only continuing to grow: Kickstarter and Indiegogo have not only helped entrepreneurs raise millions of dollars outside the traditional financing industry, they have also helped bring changes to federal legislation around small-business funding - and have produced their own offshoots, such as Kickstarter-style platforms that focus on specific niches like raising money for amateur athletes. Aereo may not be a typical startup, because it's backed by billionaire Barry Diller, but it is also aimed at disrupting a traditional business (broadcasting) that is tangled in red tape and controlled by an oligopoly.

Dozens of other startups, such as Lyft, SideCar and TaskRabbit, are trying to bring the peer-to-peer model of social business to different aspects of various industries - even custom manufacturing, where platforms like Etsy and others help creators monetize their services without having to go through the usual channels or middlemen.

Regulatory restrictions can impede these kinds of solutions for a while, or even cause one or two to fail, but the tide of which they are a part continues to advance.

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